Treasurys and Gold Good Hiding Places from Gov’t Shenanigans, For Now

If Friday’s market move was any indication, President Obama plus Congress make a nasty recipe for investors. The president’s jobs plan got a grade of barely passing, and in response investors fled toward the Treasury bond market and gold for safe haven.

Are those really the best places? For now, probably.

The president argued for a jobs-stimulus plan, but the current environment makes chances quite low for passage of anything material. And reports out of Washington indicate that the administration may also back away from more aggressive plans to prop up the housing market, or at least reverse the Federal Housing Finance Agency’s shortsighted approach to overseeing Fannie Mae and Freddie Mac.

So focus is back on the Federal Reserve and Chairman Ben Bernanke yet again. And what they plan to do could be as effective as the last few rounds of “quantitative easing” – which is not very.

Ted Wieseman, a fixed-income economist at Morgan Stanley Smith Barney, in a note to clients last week said, “A move to extend the duration of the Fed’s securities portfolio at the Sept. 20-21 FOMC meeting is likely, with the employment report underlining downside risks to the economy.”

Fed-watchers are calling the plan “Operation Twist,” and it goes something like this: The Fed shifts the average duration (or maturity) out of short-term mortgage-backed securities and agency investments into longer-term Treasurys out on the yield curve – probably about $150 billion in shorter-dated Treasury sales to buy longer-dated Treasurys – and cuts the 0.25 percent interest rate on excess reserves to zero.

All this bad news has pushed investors into Treasurys, and when prices of bonds rise, yields drop. That’s why the yield on the 10-year Treasury note fell to 1.87 percent Monday, the lowest since the Federal Reserve Bank of St. Louis began keeping daily records in 1962.

With rates this low – and the Fed has pledged to keep them low until 2013 – investors aren’t getting much of a yield on their Treasury bonds, but at least they represent a safe place.

What about gold? There are plenty of ways to invest, but so far gold-bullion investments have outshone the mining stocks.

Tyler Durden, who writes about his investments on his blog ZeroHedge (www.zerohedge.com), thinks part of the reason lies in the ratcheting up of fear, “from the S&P’s downgrade to European bank solvency, from fears of another recession to worse-than-expected unemployment. The nervous climate has pushed investors toward gold for safety, simultaneously reducing the demand for gold equities.”

The investment implications here are twofold. First, if he is right, Durden said, then “the strategy should be to buy when shares are relatively cheap and hold for the duration of the bull market. You may think we’d suffer ‘opportunity loss’ if we have to wait too long, but that could be a dangerous game; you could buy after they take off and miss out on some of the easier gains.”

Further, he believes there isn’t another sector that is both cheap and imminently poised to break out: “The ultimate prognosis, in my opinion, is that gold stocks are headed much higher. Sooner or later, a catalyst will ignite interest in our sector, and the rush will be on. Now is the time to build positions in the stocks you want to own.”

Many investors have gotten in through the SPDR Gold Trust (NYSE: GLD) exchange-traded fund, but Doug Hornig, of Casey Research, pointed out that GLD doesn’t exactly track the price of the underlying bullion. That’s important, because gold is hitting about $1,900 an ounce, closing in on record highs all the time.

There are some common misunderstandings regarding the exchange-traded funds. “GLD has steadily ascended the list of the world’s leading gold repositories, until today it has the sixth-largest global stash of the metal, at more than 1,230 tons, or 39.57 million ounces, worth over $70.7 billion,” according to Hornig.

The SPDR Gold Trust does not buy and sell gold, he noted: It creates and redeems shares in the company, which are then passed through a group of market-makers, who trade them on the NYSE, then deposit into or withdraw from an HSBC vault in London the corresponding amount of physical bullion, in the form of 400-ounce bars.

Each share will never be priced exactly at the value of a fraction of the bars because the trust deducts transaction fees and other expenses. But it’s close. During August, Hornig added, the net asset value of a share of GLD varied from 97.3635 to 97.3867 percent of the gold price, as fixed each day at 10:30 a.m. New York time.